Emerging Markets Weekly: Polish Economy Remains Weak

Following the steady but marked decline in the Polish economy throughout 2012 and Q1 2013 (where growth was a disappointing 0.5% y/y), there are now signs of recovery. Both the manufacturing PMI index and industrial production have picked up recently and it looks as though the softer stance from the Polish central bank (NBP) is starting to have an effect. The just-released Q2 GDP data showed a mild pickup in growth, to 0.8% y/y, so the economy is still far from being in good shape. Although there are some signs of improvement for Poland's neighbours and export partners, it is difficult to see much help from the external environment. Our expectations for this year's GDP growth is a meagre 1.1% y/y, increasing to 2.1% in 2014, before we finally expect the pace to pick up somewhat in 2015, to 2.9% growth. We still expect private consumption and investments to be the main drag on growth this year. Given the expected weakness in private demand, external balances should improve somewhat (and have been doing so recently), especially this year.

We expect the current account deficit to narrow to -2.8% of GDP in 2013 before widening slightly to -3.0% in 2014, but still less than in the years before the slowdown. Inflation has slowed markedly over the past 10 months, from being slightly elevated to well below the official target of 2.5% +/-1pp. Although the latest numbers show that CPI growth picked up more than expected to 1.1% y/y in July and the NBP seems to have softened its stance, we do not expect inflation to become a problem any time soon. Hence, given the very low inflation and weak growth, the Polish central bank has plenty of room for further monetary easing and we expect the NBP to cut its key policy rate to 2% by the end of the year.

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